Definition: Net credit sales are the sales generated by an organization through the extension of credit to customers less all offsetting returns and discounts.
What Does Net Credit Sales Mean?
What is the definition of net credit sales? These sales are essentially the same as net sales reported on the income statement, in that they represent the gross amount less of all returns, allowances, and discounts. The only difference between the net sales and the NCS, are the payment methods used by the customer.
In this case, when an organization establishes credit terms with a customer and the customer uses the credit to purchase the product or service offered by the company, this is deemed to be a credit sale. Total sales on the income statement include this figure.
Management uses this figure to track receivables and analyze how quickly customers are paying off their accounts. For example, this concept is used in the accounts receivable turnover ratio as well as the days sales outstanding ratio. Companies whit higher NCS figures generally tend to ones with looser credit policies that allow many more customer access to credit.
How do you calculate net credit sales? The net credit sales formula is calculated as follows:
NCS = Total Credit Sales – Total Credit Sales Returns & Allowances
Let’s look at an example.
Example
Let’s assume a manufacturing company has a major customer who purchases a significant amount of product every year. When the customer starting doing business with the manufacturer, they requested credit terms, so they could purchase product on credit and pay for it at a later date. This customer is the only customer with credit terms from the manufacturer and all other customers pay for product at the time of sale.
At the end of the year, the company had total sales of $15M, of which $12M related to sales to the major credit customer. The company received $1M of product returns, and provided allowances of $500K. Thus, their NCS would be $10.5M ( $12M – $1M – $0.5M ).
Summary Definition
Define Net Credit Sales: NCS means the net sales of an organization generated by customer purchases on credit.
